Page 257 - Accounting Best Practices

c12.qxd 7/31/03 3:18 PM Page 246
Financial Statements Best Practices
246
procedure. Training is an extremely cost-effective method for ensuring that the
accounting staff completes the financial statements in an efficient and effective
manner.
Cost: Installation time:

12–20 USE CYCLE COUNTING TO AVOID
MONTH-END COUNTS
A common effort for companies with poor inventory record-keeping systems is to
count the inventory at the end of every reporting period. By doing so, the con-
troller is assured of a reasonably accurate cost of goods sold figure, though at the
cost of shutting down the business while the counting process goes on (since this
may interfere with accurate inventory counts), which not only runs the risk of los-
ing some business, but also requires paying some employees to conduct the
decidedly not value-added inventory counting activity. Over the course of a year,
this represents either a major loss of revenue, addition to expenses, or both.
The solution is to stop taking periodic inventory counts. By doing so, there
is no stoppage of sales activities, nor is there any need to redirect anyone’s activ-
ities to counting inventory. In addition, the accounting staff no longer has to
spend valuable time during the end of the month to participate in the inventory
count, which gives the staff more time to complete the financial statements more
quickly. Unfortunately, this happy state of affairs brings with it some risks. The
main one is that inventory may become quite inaccurate over time, resulting in
cost-of-goods-sold numbers in the financial statements that will, over time,
depart quite a long way from the actual situation. If this number is inaccurate,
the borrowing base information a company presents to the bank will also proba-
bly be wrong, which may give the bank grounds for withholding additional bor-
rowings. A final problem is that if the financial statements are incorrect, the con-
troller may pay for this oversight by losing his or her job. The best way to avoid
all of these issues is to use cycle counting. This process involves a continual
count of the entire inventory so that all items, especially the high-value or high-
usage ones, have their quantities verified frequently. In addition, a trained cycle-
counter is much more likely to obtain accurate inventory figures than the less
knowledgeable group of counters typically employed for period-end counts. A
good cycle-counter is trained to investigate why there are counting variances,
resulting in changes to the underlying systems that originally caused the errors.
By using this approach, it is very unlikely that the inventory will be very far off
at any time, which gives a controller much greater confidence that the inventory
figures at the end of the month are accurate, without the need for a periodic
physical inventory count.

Cost: Installation time: